If financial Armageddon were visited upon China, the country’s banks would emerge from the rubble with little more than light bruises. That, at least, was the conclusion of a stress test conducted by the central bank.
In the very worst case, the People’s Bank of China envisaged bad loans quintupling in a flash. But it found that, even amid such carnage, banks would retain capital buffers equivalent to 10.5 per cent of their assets – a comfortable margin of safety. “Our country’s banking system has a strong ability to withstand economic shocks,” the central bank said.
Investors were not exactly persuaded. Chinese bank stocks have continued to drift downwards since late April, when the stress test results were published. Listed banks have price-to-book ratios below 1, implying that investors believe their assets are worth less than their stated value – a remarkable situation when the banks are still reporting double-digit profit growth.